Is AbbVie Wasting Your Money?

Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.

But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself, rather use it as a launching pad for additional research.

Returning value A newly public pharmaceutical giant announced a fairly massive $1.5 billion buyback program that it expects to carry out over the next few years -- coinciding, it turns out, with the narrowing fortunes of its top drugs.

Abbott Labs (NYSE: ABT) spun off AbbVie (NYSE: ABBV) on Jan. 1 with a portfolio of top-notch therapies like Humira, AndroGel, Tricor, and Triplix. But this multibillion-dollar passel of drugs has the common denominator of facing a rising tide of competition at the same time it will be experiencing pricing pressure from health insurers and government medical programs. Buying back shares may be one of the ways AbbVie is able to boost shareholder value while waiting for its drug development program to bear fruit.

Generic competition is already impacting how Tricor, Triplix, and a third lipid drug, Niaspan, will contribute to operations. TriCor alone saw a 17% drop in sales in 2012 after generics hit the market and now management anticipates sales for the three tumbling some $1.2 billion this year to fall below the $1 billion mark as Niaspan sees generic competition in 2013 and Triplix faces it later this year or next.

Humble Humira Right now, though, all eyes are on AbbVie's leading rheumatoid arthritis drug Humira, which recorded $9.3 billion in global annual sales in 2012 and is expected to generate more than $10 billion this year. While AbbVie is counting on geographic expansion and getting Humira approved for additional indications to push sales higher, it might not be able to hang its hat on the 51% revenue contribution the drug currently provides.

Amgen (NASDAQ: AMGN) is pushing for approval of the use of biosimilars -- generic, therapeutic drugs derived from biological sources -- to take on Humira, but Abbott filed a citizens petition with the FDA last year to block their use, saying it amounted to violating trade secrets. The FDA hasn't issued a decision "because it raises complex issues requiring extensive review and analysis," but the threat continues to hang over its head.

Yet JAK1 inhibitors probably pose a more immediate threat to Humira's dominance, particularly after Pfizer (NYSE: PFE) won FDA approval for its RA therapy Xeljanz, which is being hailed as a potential blockbuster drug for the pharma. Abbott began investing heavily in JAK inhibitors last year and purchased for $1.35 billion the rights to an RA drug from Galapagos.

AndroGel is also under attack. The low-testosterone treatment is AbbVie's second biggest-selling drug, with nearly $1.2 billion in revenues. But generic drug maker Perrigo (NYSE: PRGO) just gained approval for its own gel therapy by using a bioequivalence study to compare its formulation to AndroGel as the basis for gaining the FDA's nod. Bioequivalence uses a brand-name drug's efficacy and safety data to show that any differences between it and a generic rival are statistically insignificant.

Circling the wagons Of course, that's the life of a pharmaceutical -- and of the shareholders who invest in it. You're always fighting a rear guard action while looking ahead to the next blockbuster drug. Analysts note that AbbVie is also targeting more than a dozen new drug approvals over the next few years -- specifically in areas like hepatitis C, multiple sclerosis, and Parkinson's disease -- to play against the day when Humira sales dry up.

Not that there aren't obvious risks here, too. Following the death of two patients, AbbVie and partner Roche just suspended five clinical trials of the leukemia drug ABT-199 they were developing. While they're putting on a brave face and stating they believe their timetable for initiating phase 3 trials in 2013 is still a go, having to fine tune the dosage so that doesn't kill patients is a time-consuming obstacle.

A fair value Despite AbbVie's numerous rivals, the pharma still seems to be well-positioned -- at least for the next few years -- to capitalize on its current portfolio of drugs, as well as its deep bench of prospects. The stock is valued at 12 times forward earnings, putting it right in the middle of rivals Merck, Pfizer, GlaxoSmithKline, and Johnson & Johnson -- all pharmaceuticals confronting a patent cliff of their own to one extent or another.

Even experimental drugs that suffer hiccups, like ABT-199, aren't necessarily down for the count, but rather have had their timetable extended. Investors who find AbbVie's stock weakened on news of such developments just might want to avail themselves of the resulting opportunity to acquire shares when offered and benefit as the pharma buys back its stock.

Buying timeWant a deeper look at AbbVie? For some Abbott Labs shareholders, the new year brought with it a new company called AbbVie. Formerly Abbott's branded pharmaceuticals business, shares of the new stock were distributed to investors on Jan. 2. To help investors better understand the situation, The Fool has created a brand new premium report on both stocks. Inside, we outline all of the must-know opportunities and risks facing both companies, so make sure to claim this report by clicking here now.

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